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Enhancing Competition in the Postal Sector: Can We Do Away with Sector-Specific Regulation?

George Mason University School of Law; Tilburg University - Tilburg Law and Economics Center (TILEC)

May 2006

Abstract:

Over the last ten years, the European Commission has been trying to increase competition in the postal sector. In order to achieve this goal, as well as other objectives such as the enhancement of the quality of postal services in the EU and the maintenance of universal service, the Commission adopted a first postal directive in 1997. Directive 97/67 sought to progressively reduce the scope of the postal incumbents' reserved area, but also imposed a range of regulatory obligations on postal operators. This directive was amended by Directive 2002/39, which further reduced the scope of the reserved area and clarified a certain number of regulatory provisions. The Commission is expected to issue its proposal for a third postal directive by the end of this year, initiating the process of full accomplishment of the internal market for postal services by the original target date of 2009 as indicated in the 2002 directive.

While Directives 97/67 and 2002/39 have certainly contributed to open the postal sector to competition, the level of competition achieved in this sector is quite uneven. Some segments of the postal market are now subject to intense competition. Yet, others are still largely controlled by postal incumbents. The level of competition within one market segment can also considerably vary among Member States. While some Member States have completely liberalized their postal sector by going further than the requirements contained in the postal directives, others decided not go further than these requirements.

Experience teaches that creating competition in freshly liberalized industries is not easy. Incumbents will generally retain considerable market power for a number of years after liberalization. Telecommunications incumbents, for instance, still largely hold strong market positions although the sector has been fully liberalized for almost ten years. In addition, the Commission has recently acknowledged that liberalization efforts in the gas and electricity markets had failed to reach their targets. Similar findings can be made in the postal and transport sectors.

Several factors contribute to the difficulty of creating competition in these industries. Incumbents generally hold a number of significant advantages compared to new entrants, such as considerable expertise, an established brand name, the ability to achieve economies of scale (due to size) or scope (due to vertical/horizontal integration), as well as special connections with public authorities, which often remain shareholders of these firms. Another potential barrier to entry in these industries (which are often referred to as "network industries") comes from the fact that incumbents will typically hold elements of network infrastructure, which are needed by new entrants to compete on the market.

Controlling incumbents' market power is thus a central concern in liberalized industries, such as the postal sector. Such control can be achieved through two complementary tools. First, sector-specific regulation can be used to address market failures, such as, for instance, the presence of bottlenecks. Competition rules can also be used to control market power, notably by preventing incumbents to abuse of their dominant position on some markets. Such rules may also deal with a range of other anti-competitive practices, such as restrictive agreements between competitors or the granting of illegal State aids. While competition rules play a fundamental role with respect to the creation, strengthening or maintenance of competitive market structures in the postal sector, the primary focus of this paper will be on ex ante regulation. There is indeed considerable debate regarding the regulatory framework, which should be provided for in the forthcoming postal directive.

While some operators are calling for the strengthening of the existing regulatory framework applicable to the postal industry, others have been arguing in favor of a light-handed approach to regulation. Pursuant to this view, the forthcoming postal directive should only provide for minimal regulatory requirements, market power being essentially controlled through the enforcement of competition rules. Few would disagree with the overall goal of reducing regulation to its strict minimum, but it is subject to question whether the postal sector is competitive enough to roll back sector-specific regulation. This paper defends the view that sector-specific regulation has still a major role to play in the postal sector and that deregulation is premature.

This paper is divided in five parts. Following this introduction, Part II explains that sector-specific regulation and competition law are complementary tools and that both have a critical role to play to allow for the creation of a competitive postal market. Part III offers some principles for the new postal directive. It critically reviews the claim made by some that postal regulation should follow a light-handed approach and, in particular, that no ex ante access to the postal network regime is needed. Part IV argues that even in the presence of ex ante regulation, competition rules should continue to play a significant role. Ex ante regulation and competition law are complements, not substitutes. Finally, Part V contains a short conclusion.